Not-A-Pundit: The Renaissance

US Senate Passes Federal Minimum Wage, Tax Cut Bill February 2, 2007

WASHINGTON (Dow Jones)–The U.S. Senate on Thursday passed a bill to boost the federal minimum wage to $7.25 an hour and provide businesses $8.3 billion in tax breaks to offset cost of the higher payrolls. The bill also contains controversial limits on executive pay packages.

The Senate’s 94-3 vote came after two weeks of deliberations on the bill to boost the minimum wage from its current $5.15 an hour, the first increase in nearly a decade.

Sen. Edward Kennedy, D-Mass., said the bill was a matter of fairness, citing the “extraordinary explosion of corporate profits and yet the minimum wage has not gone up.”

“We as a nation do not want to have a subclass, a subclass of workers who cannot emerge out of a minimum wage,” Kennedy said.

The House on Jan. 10 voted 315 to 116 to approve a minimum wage increase without any tax cuts. The bill was a centerpiece of House Speaker Nancy Pelosi’s “first 100 hours” agenda under new Democratic control.

Inclusion of business tax benefits, such as more generous depreciation for building improvements, sets up a confrontation with House Democrats, who strongly oppose such measures.

The tax benefits range from a tax credit for hiring welfare recipients to enhanced expense write-offs and are aimed at helping businesses offset the cost of the minimum-wage hike. But the tax package has gained more attention because of offsetting revenue increases.

“The president and the Republican Congress were clear on the need to couple an increase in the minimum wage with small business tax relief, and this legislation does just that,” Senate Minority Leader Mitch McConnell, R-Ky., said in a statement. “This is a testament to what we can accomplish when we work together to move critical legislation forward.”

One measure in the legislation would limit certain deferred compensation practices, which companies use to spread out the timing of bonuses and other payments to executives. It would cap annual deferral to $1 million per year of an individual’s “nonqualified deferred compensation” arrangement.

Deferral of bonuses or other income above the $1 million cap would mean an executive would face immediate taxation on that excess amount, as well as a 20% penalty.

The move comes amid congressional criticism of large executive pay packages, such as those for outgoing chief executives Henry A. McKinnell of Pfizer Inc. (PFE) and Robert Nardelli of Home Depot Inc. (HD). Business groups, however, have criticized the provisions.

A separate provision involves the tax deductibility of top executive pay packages. Current law doesn’t allow companies to deduct compensation exceeding $1 million for “covered employees.”

The bill would expand the definition to include the chief executive officer at any time during the last year, the four highest-paid officers and any executive who previously ranked as a “covered employee” or one of the top-paid executives.

The restrictions would take effect for amounts deferred in taxable years beginning after Dec. 31, 2006. It would would raise $806 million in revenue over 10 years, according to Congress’s Joint Committee on Taxation.

The vote came after the Senate on Wednesday rejected a Republican proposal to extend several of the tax cuts beyond the renewals called for in the underlying bill.

One item in the proposal would have provided more generous expense write-offs for small businesses under “Section 179” of the tax code. The Senate Finance Committee’s tax package, approved by the panel last month, included a one-year extension of this benefit, which expires Dec. 31, 2009. Sen. Jon Kyl, R-Ariz., unsuccessfully sought to extend this benefit for two additional years, through Dec. 31, 2012, at a cost of $2 billion. Kyl’s amendment was rejected by the Senate on Wednesday.

Other tax relief approved by the Senate on Thursday would extend for five years the “Work Opportunity Tax Credit” designed to offset the cost of hiring disadvantaged workers, such as disabled veterans. This tax break, first enacted during the Clinton administration, would reduce federal tax revenue by $3.6 billion over 10 years.

The bill also would allow retailers and restaurant owners to more quickly write off the costs of remodeling leased buildings.

To offset the cost of these provisions, the bill contains several significant corporate-tax provisions aimed at halting tax abuses.

President George W. Bush hailed the vote, calling the Senate bill “significant legislation that will benefit America’s workers and small businesses.”

Bush, in a statement, said the bill takes “a step toward helping maintain a strong and dynamic labor market and promoting continued economic growth.”

“I strongly encourage the House to support this combined minimum wage increase and small business tax relief,” he said.